Bitcoin exchange-traded funds are a type of investment in which the users can gain exposure to Bitcoin trading without needing to own it directly. In this, a number of Bitcoin-related or other digital assets are clustered into a pool and offered on a traditional exchange to be traded as ETFs.
This allows users to invest in the ETF rather than investing in Bitcoin directly and saves them the trouble of constantly worrying about the price fluctuations of the coin in the market. So, in a way, you are indirectly investing in a cryptocurrency without the hassle of buying, storing, and saving the currency in your wallet.
How Does the Bitcoin Exchange Trade Work?
At first, the ETF purchases Bitcoin from other exchanges or through direct transactions from a counterparty. After the coins are purchased, they are pooled and securely stored by some third party to ensure their safekeeping. It is the organization’s or person’s responsibility to secure the Bitcoins and protect them from any unauthorized access.
ETF also employs a create-redeem mechanism. This allows the ETF to be traded on various exchanges as individual stocks while staying related to the underlying assets they track. This helps in maintaining the underlying net asset value or NAV of the ETFs.
In this scheme, the price of the ETF is significantly affected by the market value of the Bitcoin. As Bitcoin surges in the crypto market, so will the ETF, and vice versa.
Advantages of Bitcoin ETFs
There are several advantages to investing in a Bitcoin ETF. Some of them are listed below.
- Convenience: Investing in Bitcoin is much more convenient and simpler than investing in the coin directly. This will save you from the additional work of buying, selling, and storing the coin in your wallet. Additionally, if you somehow lose the password for your wallet, your Bitcoin is lost forever. So, investing in Bitcoin ETF can save you all this trouble.
- Diversification: This is one of the main highlights of an ETF. It does not just contain one item, there can be numerous assets present in a single ETF. This can help in mitigating risks to a great extent.
- Easy access: The Bitcoin ETF provides mainstream traders easy access as it involves trading directly on the stock exchange. They don’t need to learn new things like wallets and various trading concepts.
- Secure and easy storage: By employing a third-party custodian to secure the digital assets, the investors no longer need to worry about safeguarding their private keys.
- Low investments: The Bitcoin ETF does not require a huge investment, but can support low investments too.
In essence, the ETF provides mainstream traders with an opportunity to invest in crypto without worrying about the risks associated with investing in the crypto market.
Risks Associated with the Bitcoin ETFs
Now that we know about the benefits of investing in Bitcoin ETF, let’s look at the risks associated with investing in it. Even though the Bitcoin ETF provides an easy way to invest in the crypto market, it has its fair share of disadvantages.
- Additional charges: On top of the brokerage commission fees, the investors have to pay a recurring asset management fee.
- Tracking Error: Sometimes there can be tracking errors associated with the price tracking of Bitcoin, especially during high volatility periods.
- Tax: Investors are subjected to paying a hefty amount as tax while selling a successful ETF.
Even though the ETS provides simpler and easier access to Bitcoin, it comes with a hefty cost.
Conclusion
The Bitcoin ETF is a good way to immerse yourself in crypto trading if you’re new to it. But, it does not allow you to claim ownership of the coin you invested in. Also, there is a huge difference between owning a Bitcoin directly and indirectly, especially, in profit.
Also, sometimes investing in these Bitcoin ETFs can be a hassle in itself due to the add-on charges and taxes. So, if you’re looking to invest in a Bitcoin ETF, conduct thorough research before doing so.
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